By Stuart Eustice, Partner 

Background

This claim was brought in respect to monies paid to Patties Foods Ltd (Patties) by Entyce Food Ingredients Pty Ltd (Entyce) pursuant to a deed of settlement (Settlement Deed) regarding the supply to Patties of contaminated and potentially contaminated frozen berries by Entyce. The berries, recognisable as Nanna’s Berries, Creative Gourmet and Chef’s Pride, were contained with Hepatitis A virus (Products). The contamination occurred in China during the period of insurance, but before they were shipped to Entyce.

As a result of the contamination and the related risk of other berries supplied being contaminated, Patties were forced to recall and withdraw products sold into the Australian market and destroy other substantial quantities of frozen berries in stock.

Patties claim against Entyce was brought by its insurer, AIG Australia Limited (AIG), which was ultimately settled between the parties in May 2019 on terms that provided for, among other things, the payment by Entyce to Patties of $4,000,000 on the terms set out in the Settlement Deed.

The Proceeding

Entyce was an insured party by CGU Insurance Ltd (CGU) under the CGU Policy. The CGU Policy provided liability cover for certain personal injury, ‘Property Damage’ and ‘Advertising Injury’ liability. Entyce had sought indemnity from CGU in respect of Patties’ claim, and CGU had refused to cover. Consequently, CGU was joined by Entyce as a party to the proceeding.

The issues were all related to whether the obligation to indemnity Entyce under the CGU Policy was excluded by the CGU Policy.

The Victorian Supreme Court ultimately found that Entyce’s claim against CGU failed. The liability under which Entyce sought indemnity was found to be excluded under clauses 6.14.3 and 6.14.4 of the CGU Policy.

Clause 6.14.3:

Clause 6.14.3 of the CGU Policy relevantly excluded an obligation to indemnity Entyce in respect of its liability for:

the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;

The Court noted that the ‘recall’ of the Products was only one of the specified events or circumstances that the costs of, other damages claimed, needed relate to, in order to engage the first part of the exclusion clause. “There are other separate events and circumstances that will engage the first part of the exclusion in the clause where the insured liability is for costs of, or damages claimed in relation to, one or more of them”.[1] These additional circumstances included:

1. the withdrawal of the Products;
2. inspection of the Products;
3. repair of the Products;
4. replacement of the Products; or
5. the loss of use of the Products.[2]

His Honour, Justice Connock noted that “[t]here is in my view no legitimate basis for seeking to construe these separate events as being in some way being confined or narrowed only to ‘recall’ or even withdraw or recall”.[3] The Court found that so much was clear from the “natural and ordinary meaning of the words used, and no ambiguity of the kind sought to be raised exists”.[4] There was similarly no legitimate basis for construing ‘[l]iability for the costs of or damages claimed in relation to…’ as operating only in respect of costs or expenses and not damages, or related only to the claimed operative word of ‘recall’.[5]

Clause 6.14.4: 

At issue was also whether CGU’s obligation to indemnify Entyce was excluded by clause 6.14.4 of the CGU Policy. Clause 6.14.4 related to ‘Property Damage’ to the Products where such damage is attributable to a defect in them or to their harmful nature or unsuitability:

Property Damage to the Products if such damage is attributable to any defect in them or to their harmful nature or unsuitability, other than those Products repaired, serviced or treated by the Insured after such Products were originally sold, supplied or distributed, however this Exclusion 6.14.4 shall be restricted to the defective or harmful or unsuitable part of the Product and shall not apply to Property Damage to the remainder of such Product or Products.

The Court concluded that the exclusion in clause 6.14.4 also applied.[6]

“[E]ven if the exclusion in clause 6.14.3 had not applied, CGU was not required to indemnify Entyce in respect of its liability to Patties under the Settlement Deed. Again, it follows that CGU did not breach the terms of the CGU Policy by failing or refusing to do so”.[7]

The contamination of the berries made them ‘defective’, ‘harmful’ in nature and ‘unsuitable’ within the meaning of the expressions used in clause 6.14.4. “In the context of clause 6.14.4, the existence of this risk also meant that there was a ‘defect’ in them and that they were ‘unsuitable’…Because the contaminated berries are tangible property and have suffered damage, they have been the subject of Property Damage”.[8] Given this, the Court held that CGU was not obliged to indemnify Entyce under the CGU Policy, and that CGU has not breached the terms of the policy by refusing or failing to do so.

The Court did not find it necessary to decide whether the claimed right to indemnity was also excluded by clause 6.11.2 of the CGU Policy.

Conclusion

This decision highlights the importance of policy wording and subsequent interpretation, particularly where an insured is seeking indemnification. The Court in this decision analysed the wording of each of the exclusion clauses in great detail, with the ultimate consequence of exclusion being significant for Entyce.

[1] Entyce Food Ingredients Pty Ltd v CGU Insurance Ltd [2020] VSC 757, 65.

[2] Ibid.

[3] Ibid, 66.

[4] Ibid.

[5] Ibid, 67.

[6] Ibid, 100.

[7] Ibid.

[8] Ibid, 107.